Oil ministry not in favour of raising diesel, LPG prices: Deora

New Delhi: Oil minister Murli Deora today said his ministry is not in favour of raising diesel and domestic LPG prices as a response to the spurt in global crude oil prices, as the move will add to already high inflation rate, reports PTI.

"We are trying to see that we do not have to increase prices," he told reporters here.

Last week a meeting of the Empowered Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee was indefinitely postponed on Mr Deora's insistence of not raising fuel prices just now.

"I don't think the EGoM should meet just now to decide on raising prices," Mr Deora said today.

Others in the government have favoured raising fuel prices as a response to hardening of international crude oil rates to over $90 per barrel while Mr Deora has preferred government subsidies to lessen burden on the common man.

Diesel has a weightage of 4.67% in inflation, while LPG contributes 0.91%. A hike now would further accelerate inflation, which is currently at 7.48%.

Mr Deora wants the government to make up for at least half of the Rs72,812 crore revenue loss state-owned oil firms are likely to incur this fiscal on selling diesel, LPG and kerosene below cost.

The EGoM was originally scheduled to meet on 22nd December but was deferred to 30th December. The meeting was at the last moment deferred without a new date being given.

The panel was to meet to consider at least a Rs2 per litre hike in diesel price and Rs30-Rs40 per cylinder raise in LPG rates.

Mr Deora said the government would do everything possible to protect balance sheets of state-owned oil firms and insulate the common man from vagaries of international market.

"In 2008, when crude oil shot up to $147 per barrel, we insulated the common man and provided for Rs1,03,000 crore from the budget to subsidise fuel," he said.

The under-recovery (or the revenue oil companies lose) on diesel today stands at Rs6.99 per litre, sources said.

Besides diesel, the oil firms lose Rs19.60 per litre on PDS kerosene sales and Rs366.28 per 14.2-kg LPG cylinder.

The oil firms had last month raised petrol price by Rs2.94-2.96 a litre but the hike was short of Rs3.5 a litre desired increase to make retail prices at import parity.

The government had in June 2010 freed petrol prices, but the state firms, which control 98% of the retail market, continue to informally consult the oil ministry before revising prices.


Iran oil exports to India on despite dispute

Dubai: Iran's oil exports to long-time trading partner India had continued despite a dispute over the method of payment, reports PTI quoting a top Iranian official.

According to a Tehran Times report, Ahmad Qalebani, the head of state National Iranian Oil Company (NIOC) said the two countries were determined to carry on co-operating despite problems in agreeing to a new payment method after India said last week it would no longer use a regional clearing house system which had been criticized for being opaque.

"The economic co-operation between Iran and India in this (oil trade) connection is still continuing," Mr Qalebani said.

Mr Qalebani, however, made no reference to any new arrangement between the two countries, which implied the issue remained unresolved.

Iran's deputy oil minister Ahmad Khaledi had earlier said that the dispute with India had been settled by changing the currency for trading.

"By changing the currency for oil transactions between Iran and India the problem was solved," he was quoted as saying.

Meanwhile, the local unit of ratings agency Moody's has said the India-Iran oil payments row could hit Mangalore Refinery and Petrochemicals' (MRPL) profitability if the dispute continues beyond a month, ICRA, said on Monday.

"If the issue remains unresolved beyond a month, MRPL's refining throughput could be impacted as it tries to find alternative sources to replace crude oil imported from Iran under term contracts," ICRA said.


CLSA: Bottom-up approach for 2011; India premium may be under pressure

The brokerage says India premium valuations will come under pressure as global investors veer towards ‘cheaper, commodity-geared markets”.  Its best bets are plays on inflation, high growth and high free cash, like BHEL, Dr Reddy’s, Hindalco, IDFC and M&M

CLSA, one of the region's largest and most highly-rated independent brokerages, says India faces headwinds from renewed rising inflation on stronger global commodity prices and domestic factors like rate hikes, tighter liquidity and a rising current account deficit largely on account of higher oil prices, which is why a bottom-up approach would work better than the top-down this year. The brokerage has set a December 2011 Sensex target of 22,500. At that level, the market is expected to trade at about 16 times, and this it believes is reasonable, given a 19% Sensex EPS growth in FY12 after a 31% growth in FY11.

With the Sensex price-to-earnings ratio at 17% above its 10-year historical average, CLSA expects a de-rating in India's premium valuation multiples. Most of the upgrades, this year, will come in the commodity sectors. It is likely that we will see a correction in this quarter with global investors veering towards "cheaper, commodity-geared markets" and because of a "bunching in government divestment-related equity issuances," it says in a report to clients.

The cheaper commodity-geared markets it refers to are Brazil and Russia. "While the weight of the energy and materials sector in the India benchmark indices is less than 30%, it is (as much as) 50-75% in markets like Brazil and Russia." In addition, there's a risk that foreign equity inflows could be attracted to cheaper markets with strong economic linkages, like Korea and Taiwan, in the event of a strong rebound in the developed economies.  

CLSA points out that equity issues in the pipeline are worth almost $30 billion. "The current pipeline of IPOs with SEBI is Rs503 billion ($11 billion). Adding another Rs590 billion ($13 billion) in the proposed government sector offerings and making another $5 billion allowance for other QIPs/offerings that may be under consideration, the overall primary market raising (maximum) would be $29 billion." While the brokerage is not alarmed at the size of the pipeline, it says that bunching up of government offerings could put pressure on the markets. Major government issues in the pipeline include Rs210 billion by IOC, Rs160 billion by SAIL, Rs140 billion by ONGC, and Rs50 billion by HPCL.

In inflationary conditions, the sectors that are likely to outperform include materials, software and energy, while consumer durables and staples will be constrained by competition and rising rates. In its 'visible growth' category, plays such as consumer and pharma stocks riding structural growth drivers, and industrials with strong order books or new capacity additions, should do well, it believes. "The FCF yield screen suggests some opportunities in property stocks too," it says.

"BHEL offers visible near-term growth; fears on competition are overdone. IDFC looks best placed to gain from the huge infrastructure financing opportunity. M&M is well positioned to profitably grow volumes on rising agri incomes. Dr Reddy's huge drug pipeline will drive a surge in profits over FY12-14. Hindalco's new aluminium capacities will drive 23% CAGR in volume, restore high profitability and help deleverage the balance sheet. Our top mid-cap picks are Exide, e-clerx, SR Sugar, Jain Irrigation and Titan," CLSA says.

It expects inflation will correct to about 6% by March 2011, but trend back to 8% by March 2012. This will be mainly because of a rise in global commodity prices (as the percentage of the wholesale price index basket linked to global commodity prices has increased) and rising food inflation.

Inflation has its risks for the stock market, like the potential slowdown in consumer spending, a squeeze in profit margins of corporates, the effect of currency depreciation and monetary policy actions aimed at containing inflation as well as administrative measures by the government to check prices for some commodities that may be deemed to be essential (possibly steel, cement and sugar).

Tightness in liquidity and rising interest rates also do not augur well for the market. "We believe that the RBI (Reserve Bank of India) will be required to hike policy rates during 2011 to curb inflationary pressures." However, a pick up in government spending will help, says CLSA. "Although the government raised $15 billion more than budgeted from the 3G/BWA licence auctions in July 2010, the borrowing programme was not cut back in anticipation of additional expenses. While the additional expenditure (introduced through two supplementary grants aggregating Rs740 billion) has now been approved by parliament, the interim period has seen a build-up in cash balances of the government with the RBI (Rs920 billion in December 2010, versus Rs480 billion in June 2010) and thus a net liquidity drain from the system." (3G/BWA stands for third generation-for GSM-and broadband wireless access-for CDMA.)

CLSA sees some of the strong performers of 2010 coming under pressure. "Stocks in sectors that are incrementally seeing pressures on growth and have been strong performers of 2010 look most at risk for a tactical correction. In this category, we see PSU banks, oil PSUs, airlines and select consumer names."

The brokerage points out that quality will prevail in 2011. The spate of scams that broke out late 2010 have hurt risk perception. It found that after the Satyam scandal stocks that have a dodgy corporate governance record have been slow to bounce back and quality stocks have sustained outperformance. Corporate governance risks will weigh on mid-cap valuations, it says.

Since free cash flow is more valued in periods of rising capital cost, even some property stocks come out strong in this category. "JP Infratech, SR Sugars, Sobha Developers, Cairn India, Sterlite, DLF and Ashok Leyland are our preferred stocks in this basket," the brokerage says.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.) 


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